Netherlands Central Bank Statement

Author: | Published: 5 Sep 2017

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The Dutch economy has emerged from its double dip. In
fact, for 2017 we expect economic growth to peak at 2.5%, the
highest growth rate since 2007. Robust growth is expected to
continue in 2018 and 2019, exceeding potential growth. By the
end of 2019 we expect the Dutch output gap to close and real
GDP to be about 10% higher than its pre-crisis level. This
means that the Dutch economy will perform at full potential by
2019. To date, events such as Brexit and the result of the US
presidential elections, have not particularly hindered the
Dutch economy. In the longer run increased protectionism may
harm Dutch exports.

The strong economic performance is broadly based and
supported by all expenditure categories. For 2017 we expect
world trade to pick-up and corporate investment to recover.
Private consumption remains a driver of economic growth as
well. As house prices continue to recover–improving
household balance sheets–a positive feedback loop is
emerging, with rising consumer confidence and employment,
fuelling higher consumption and house purchases. As employment
grows, unemployment is set to fall to 5% in 2017 and is
expected to decline further to 4.4% by 2019.

Public finances quickly moved towards balance after the
start of the upturn in 2014. For the first time since the
financial crisis, 2016 saw a slightly positive government
balance (0.4% of GDP). We expect the surplus to increase to
1.1% of GDP by 2019.

The long period of consolidation and reform seems to have
paid off. However, solid economic growth does not mean that
policymakers should be complacent. First, the Dutch government
should strive for a budget surplus in economically favourable
times to create room for stabilisation in case of a next
crisis. Second, further reform is necessary to prepare the
Dutch economy for the future. Now is the time to make the Dutch
economy more resilient and more stable.

The housing market is among the most pressing structural
challenges. Housing prices are currently rising rapidly,
especially in the major cities. While there are signs of local
overheating, credit growth is losing momentum. The spiralling
house prices in the cities are mainly attributable to scarcity
pricing. Ongoing migration to the cities is spurring demand for
urban housing and supply is failing to keep pace. This reveals
a structural supply shortage, especially in the private rental
market, mainly resulting from planning restrictions, a lack of
capacity and the absence of incentives to build more rental
housing.

Additional steps are required to create a more balanced
housing market. Increasing housing supply will reduce
shortages, but leaves institutional imbalances unaddressed. An
accelerated phasing out of the mortgage interest relief scheme
is vital to level the playing field between buying and renting,
and would make private rental construction more attractive for
municipalities. Further reducing this subsidy on mortgage
credit will also decrease the housing market's dependence on
debt financing. Moreover, a gradual decrease of the
loan-to-value (LTV) limit to 90%, as advised by the Dutch
Financial Stability Committee in 2015, will further reduce the
reliance on debt and increase the resilience of Dutch
homeowners.